What Are Sheep?
Sheep is a pejorative term for an investor who lacks discipline and whose trading strategy is unfocused and predicated on the suggestions of others, like friends, family, and purported financial gurus. Rather than following their own research and due diligence, a sheep mindlessly follows the herd, chasing trends and making uninformed trades.
- Sheep is a disparaging term for traders who simply follow the crowd without making their own decisions or evaluations.
- The behavior of sheep may be contrasted with other wall street "animals" such as bulls and bears, which both have a definite view on the market.
- Sheep can prove to be profitable targets for certain investment advisors or "gurus" as they tend to be more susceptible to sales pitches and take advice unquestioningly.
Sheep may lack knowledge about investing tactics and principles, or may not invest the time to do the proper research to become educated about how to manage their investments. This leads them to lack confidence in their own ability to make investment decisions, so they feel the need to rely upon the guidance or advice of others. Unfortunately, they usually end up placing their financial future in the hands of people who may or may not be reliable sources of sound investment advice.
This type of investor often makes rash investments without first determining whether these decisions are financially viable. The behavior of sheep contrasts with that of bulls and bears, who have focused views about the market that may not always end up being profitable but are, at least, the result of their own analysis.
Like the animal that inspires the term, an investor who acts like sheep is a follower, relying on someone else (the shepherd) for guidance. These shepherds can come in the form of financial pundits, the latest trend, or market story. Well-intentioned, yet perhaps not quite so knowledgeable, friends and family members can also serve the role of shepherds for sheep investors.
Sheep-like investors are often the last to get in on a major market move, such as the tech boom of the late '90s that culminated in the tech bubble, because they base their investments on what is being talked about the most. Research, aided with the benefit of hindsight, has shown that sheep-like investors are the most likely to sustain investment losses because they tend not to have a clear investment strategy.
Sheep Characteristics and Potential for Risk
Sheep investors are particularly vulnerable to making poor decisions and costly mistakes in a strong bull market atmosphere, as this is when many investors are feeling optimistic and confident. Some may even become overconfident, especially if they get caught up in the excitement of positive momentum, and this may make the sheep more prone to making risky moves.
To make matters worse, investing-related services and products may seize on this opportunity, stepping up their "hard sell" efforts to promote investing materials, tools, and services. This, in turn, can cause sheep to rush in and, possibly, lose even more money in addition to the amount they had already invested in stocks and securities.
For those "gurus" seeking to sell advice and financial products, sheep make particularly profitable targets because they tend to be more susceptible to convincing-sounding sales pitches and persuasive tactics.